Excellent article in today's The Wall Street Urinal. Seems like some people think Global will not have to add even if the price is below 34.56. Seems like everyone in the article thinks the merger will happen.
Dow Jones Newswires -- August 25, 1999
DJ Market Stirs Questions On Global Crossing/Frontier Pact
By Shawn Young
NEW YORK (Dow Jones)--Global Crossing Ltd. (GBLX) plans to buy Frontier Corp. (FRO) as
soon as next month, but its stock will have to leap about 13% for things to go as originally planned.
Weakness in Global Crossing's share price has cut the value of its all-stock offer for Frontier to
$55.84 a share, or about $9.9 billion at Tuesday's close, from $63 a share, or $11.2 billion. At this
level, Frontier could walk away.
Analysts and investors say the companies aren't likely to break up, but they probably will settle on a
final price lower than $63 unless Global Crossing's often-volatile stock rallies as the closing nears.
The ultimate value of the deal will be determined by Global Crossing's average share price on 15 out
of the 30 days before closing, a clock that may already be ticking.
"There has been no agreement to renegotiate and it would be premature to do so until we have a
more accurate sense of what the price will be," said Global Crossing Vice Chairman Tom Casey,
who is in charge of corporate development, which includes merger negotiations.
Global Crossing could compensate for a weak stock price by adding more cash or stock to its offer,
but if its shares stayed at recent levels, it would be unlikely to come up with a full $63 worth,
observers say.
Frontier's stock has been trading about 16% below the recent value of Global Crossing's offer. The
discount suggests that investors aren't expecting a full-price closing. Such a discount also normally
indicates that investors think the deal might fall apart, but that doesn't seem to be a worry this time.
Mutual Need Expected To Hold Deal Together
"The bottom line here is that these two companies need each other and they'll probably work
something out," said Donaldson, Lufkin & Jenrette Securities Inc. analyst Richard Klugman.
The deal would bring Global Crossing, of Bermuda, valuable cash flow and a crucial U.S. foothold
for its globe-girdling telecommunications network. Frontier, meanwhile, would gain international
scope. The Rochester, N.Y., carrier has an extensive, high-tech network, but has struggled on and
off for years in its core long-distance business.
Both companies have said they remain committed to their plan, and Global Crossing Chief Executive
Robert Annunziata said Monday he is confident the merger will close.
"The strategic imperatives are still there. Nothing has changed," said Frontier spokesman Jim Collins.
With long-distance stocks in general getting clobbered and Frontier hit hard by price competition
among carriers, many see Frontier as simply too weak to walk away. Its stock would probably
plunge into the high 20s or low 30s if it did, observers said.
"The alternatives to not going through with this are too devastating," said Ted Levy, equity strategist
at McDonald Investments of Rochester, N.Y.
Analysts say the company could have trouble attracting another suitor that would have more to offer
than Global Crossing.
Frontier drew a $68 a share offer from Qwest Communications International Inc. (QWST) when
Qwest was trying to pull Frontier and US West Inc. (USW) out of their deals with Global Crossing.
But Qwest dropped its bid for Frontier when it won US West, and its overture to Frontier struck
many as more of a bargaining ploy than a serious offer.
With the deal between Global Crossing and Frontier likely to hold, the question is price.
Portfolio Manager Sees Closing Price In High 50s
"I am not expecting them to get $63," said Brian Hayward, portfolio manager for the Invesco
Worldwide Communications Fund, which has taken advantage of Frontier trading in the 40s to add
to its position in the stock. If Global Crossing's shares don't slide further, Hayward said he expects a
closing price in the high 50s.
"That's not a bad return," he said. "That's what we were thinking when we added."
Investors who bought the stock near its 52-week high of 60 3/8, reached June 23, will no doubt be
less content.
There may be a cluster of lawsuits, said analysts and investors, who nevertheless expect most
shareholders to support the merger.
Given the market's apparent faith that the deal will close, traders point to technical factors to explain
why Frontier is trading so far below the takeout price.
Among those factors is the fact that merger specialists known as risk arbitragers have stayed on the
sidelines and are not playing their usual roles.
Arbitragers usually buy shares of the seller's stock, expecting the price to come up to the takeout
value. But they also place a tandem bet by selling the buyer's shares short, which means they bet the
stock will fall. In order to do this, they have to borrow the stock, and there simply aren't enough
Global Crossing shares available to borrow.
Also, shares of both buyer and seller are getting their share of the punishment the market has dealt to
long-distance stocks in general recently.
The result is to deprive Frontier of a price support it normally would enjoy at this stage in a merger
deal. Its NYSE-listed shares recently were down 1/2, or 1.1%, to 46 1/2 in light trading.
Global Crossing shares are typically volatile, and several investors said the possibility of an abrupt
recovery in its share price is not far fetched.
"You could see five points in this stock in one or two trading sessions," said one trader who asked to
remain anonymous. "There's a lot of time."
Global Crossing shares recently were down 1/2, or 1.6%, to 30 1/8 in light Nasdaq trading.
Under the terms of the agreement between Frontier and Global Crossing, Frontier gets $63 as long
as Global Crossing's average share price is between $56.78 and $34.56. It has been under the low
end of this so-called collar for most of August. It last closed above the collar level on Aug. 5.
If Global Crossing's share price is below the collar, Frontier gets 1.82 Global Crossing shares for
each share of its own stock. With Global Crossing at 30, that works out to $54.60 a share, or about
$9.7 billion.
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